Re-engineering the Governance Risk and Compliance model.
In recent years, largely as result of increased regulatory intervention, financial service providers, and particularly banks, have been encouraged to migrate to the use of powerful, function-specific software for determining potentially unusual characteristics in client conduct and behavior, in order to fully comply with the wider requirements of the anti-money laundering and terrorist financing interdiction process.
As the focus on transaction monitoring has gathered pace, new regulatory requirements have been added to the various responsibilities managed by the Governance Risk and Compliance Departments, and now a far wider canon of financial institutions are required to carry out transaction monitoring on a far wider variety of activities.
As well as continuing to monitor the basic KYC and name-checking procedures, software customers can now choose from a wide variety of software offerings which will provide facilities to engage with internal fraud problems, financial crime management including credit card abuse , anti-money laundering and terrorist financing requirements, PEP lists, Corruption indices, Sanctions listings etc etc.
Now, added to this, are the requirements to be able to monitor broker activity both within the institution and as a result of third-party client self-trading actions. This obviously requires more detailed and sophisticated software than the KYC/PEP tools, which means that a more equal relationship between vendor and bank becomes even more vital. This is particularly true for certain providers who don’t understand the banks, don’t understand the distinction between the front, middle and back office, and whom the banks don’t trust in any event. The winner in this one-sided contest becomes the company which only succeeds because their systems are not complex and they are the cheapest. Thus there is no added value.
Market surveillance tools are now increasingly being called for, looking for market manipulative behavior, or systems which will detect potential market abusive activities. Most recently, US Regulators are now demanding that their EU counterparts impose US extra-territorial requirements on EU exchange members (the recent CFTC oil contract short position reporting limits imposed on ICE are an example), requiring them to submit to US oversight by ensuring that short position limits are not being breached in certain volatile commodity contracts, and to alert their home regulators when clients or brokers take short positions in these contracts in volumes that could be deemed to possess potential volatility-enhancing characteristics.
All the knowledge about these regulations takes its provenance from a legal requirement enunciated in a jurisdiction somewhere in the world, whether it be in the UK, the EU or the USA; and whether it be promulgated by the UN, The Bank of England, the EU Commission, the UK Treasury, or the various US agencies whose actions possess extra-territorial implications such as the US Treasury, OFAC, the SEC et al.
Knowing how they work and how they are applied in the regulatory process is the function of a highly qualified and well-practiced individual sales leader, who also understands how the banking process works, and how each individual piece of legislation will have an impact upon the conduct of business of an individual client institution. Hiring such a skill-set is not an impossibility, vendors can look to hire people from banks. If this is not possible then they can educate their own sales leaders. This might be more difficult as these sales people tend to feel that the ‘sale is king’ and everything, including the most basic of knowledge, becomes secondary and in many organizations unnecessary. You often hear the well trotted out phrase, ‘You don’t have to know what you are selling to sell, a good sales person can sell anything’. This may be true for double glazing, but for banking regulatory software, well we can all see where that philosophy has led!
Currently, there are a wide number of software vendors, (World Check, Oracle, Actimize, Norkom, Fiserv, Bwise, Northland Solutions, SAS Institute, Unisys, etc and a host of smaller vendors) who offer their products on either side of the Atlantic, and now, increasingly, in the Middle East and South East Asia.
Traditionally, some of these vendors, with a few special exceptions, have emerged from the traditional IT software background, designing tools and solutions to be used by banks and financial institutions, and with the primary aim of enabling the client to enhance his profitability. In most cases, the traditional software being sold was either a new edition of an already established product, which had, over time, attracted a solid following of adherents, who could be generally expected, either through inertia, or alternatively the cost and difficulty in re-tooling and re-positioning their established core banking systems, to take the new editions as a matter of course, as they were delivered. Some providers installed these updates as part of their on-going contractual arrangements with their clients, which ensured that the client didn’t even have to think about the sales process at all, and just responded with his cheque-book.
There have been some vendors however who have also helped their clients meet regulatory requirements. Core banking vendors like Temenos, Misys, ERI Bancaire, Infosys, Flexcube/Oracle, add risk-management plug ins or OEM, or they white-label compliance and fraud products as an added-value service. They are not designed to be market leading even though they can add great value to the customers, they are there so that the vendor can simply say that they have that particular offering. So the question, ‘do you offer GRC products’ could be answered: ‘yes of course, it is part of our overall offering’.
The relationship between vendors and clients in the sales-process for traditional software products was a fairly easy-come, easy-go arrangement. Most of the time, the first port of call was the client IT department, and the relationship with the head of IT was usually a well-forged one, sometimes going back over years. The IT head knew the strengths and weaknesses of the individual providers with whom he dealt. He knew how far he could push for discounts, and he generally knew what he would get for his budget.
In the case of new products, the vendor’s representative’s sales process in days past was based largely on networking and up-selling, relying on his knowledge of the kind of ‘sweetners’ which would be needed to get the different clients’ interests aroused. Whether this was a trip to a leading Golf Tournament, a day at a major race meeting, or a night out in a lap-dancing club, each client buyer had his favourite method of engagement.
As a means of last resort, the salesperson might engage in an RFI/RFP process if it was thought necessary, but most salespeople hate this method. Apart from anything else, it meant having to spend time filling up complex questionnaires, and in most cases, the salespeople wouldn’t know most of the answers, and would have to rely on the pre-sales team for help. The pre-sales team however do not always possess the contemporary requisite level of domain skill needed to sell these complex regulatory products expertly. They possess high levels of technical expertise admittedly, but few of them have the necessary degree of commercial comprehension to understand how the product being offered might not necessary be commercially viable within the specific client profile, and how having to engage in too much pre-implementation consulting and re-engineering could easily make a product wholly unsuitable.
One major US software provider particularly suffered from this condition. Any push-back against what was a totally unsuitable product offering would be met with the ‘pre-sales’ response, ‘Just tell them we can make it work for them in that way’. They completely failed to understand that the client did not want to pay more money and wait for the months of additional consulting time and software re-engineering it would take to get what was already an unsuitable and expensive piece of kit fitted into their IT portfolio.
In any event, everyone in the process of completing RFP’s knew that such an exercise was a complete waste of time. If the vendor wasn’t the company defining the terms of the RFP for all other competitors to complete, then there was no point in competing.
RFP’s were in most cases the last resort of the purchasers inside the client house, who would fall back on the requirement for an RFP in their procurement process, as an excuse for their own lack of knowledge.
The relationship between the clients and the vendors has always been a fairly uneasy one, particularly in the new GRC products, because their effectiveness relies heavily on significant levels of post-sale support to the client, both in training in how to use the product most effectively, and continuation analysis in better interpretation of the alerts generated, and their criminogenic potential or meaning. Vendors salespeople are never going to offer that kind of support to a client because they do not have the expertise themselves . Within their own company, most software vendors’ salespeople consider themselves to be incredibly elevated, and demand significant input from the pre-sales teams and the domain experts within the company.
In most cases they are unwilling to ‘stretch’ themselves too much to get to grips with a new and complex product which requires some time to understand its workings, and, instead, will only focus their attention on those products which they know they can sell most easily and so ‘make their numbers’ in the quickest time possible. Salespeople are obsessed by their commission payments, some of which are calculated in the most arcane ways, and which almost inevitably mean that salespeople will focus on maxing out the commission potential from a particular sales strategy, to the detriment of everything else in their sales catalogue In these circumstances, trying to get them to focus on a new product offering, particularly if it doesn’t carry a ‘big ticket’ price, is doomed to failure.
Any push-back by a member of the pre-sales team or a domain expert who insists that the salesperson take their own responsibilities in the process will be met by loud accusation throughout the company of an unwillingness ‘to step up’ and assist in the sacred act of selling. Other accusations can include ‘failing to give me the brief I need to sell effectively’, but whatever the excuse, it usually boils down to the salesperson demonstrating their lack of confidence in their own ability to sell outside the box, in circumstances where they do not have either the knowledge or the willingness to acquire the knowledge necessary to enable them to sell a new product successfully.
Being associated with failure to sell a new product profitably threatens both their commission expectations, and their self-anointed air of superiority . This is a very important point and so often overlooked, because the 50-50 salary structure engenders an environment whereby the sales people have no interest in spending time developing their skill-set as it takes away time from trying to earn money.
The client institutions on the other hand, look upon the salespeople involved from the vendor’s side as an inherent breed of inferior individuals, members of a class of ‘untermensch’ who do not deserve any respect and even less time. Pre-sales teams are looked upon as being almost entirely composed of ‘geeks’ and technophiles, who possess no commercial instinct, and who do not understand the commercial imperative; while the salespeople, are perceived to be inherently treacherous, who will say anything if they think it will win the contract and who are focused only on their own commission.
Perhaps not unreasonably, the sales side are not perceived to offer any form of provision of essential equipment or systems that will help the compliance team with local or international regulatory requirements. Banks have an inherently negative view of salespeople, a feature which is so often borne out by the comments contained in so many RFPs which often admit that a large proportion of the responding vendors will be inadequate. This almost inevitably results in the employment of Management Consultants to determine product choice, but at vast cost, (One major insurer spent over £1,000,000 on consulting advice, which they subsequently ignored)! Such actions do not invoke confidence in the final vendor chosen. The banks on the other hand are constantly under pressure from their non-executive directors to minimize their (the non-execs) risk, when choosing a vendor. Only in the most extreme cases do the banks perceive the vendors to be equal partners in the process, professionals who add value to the business process.
The problem is that financial institutions believe those in the business departments to be innately superior to any other kind of partner in their commercial sector. They cannot believe that anyone other than their own kind can understand their business, and they have no intention of talking out of school. Headhunters know this phenomenon better than most because during buoyant financial times, bankers will almost never entertain the idea of moving over to a software vendor house under any circumstance! However, they do not pay the same degree of respect for the compliance departments, many if not most of whom are staffed by young, relatively inexperienced people, earning very low salaries by conventional banking standards. There may be 6 figure salaries available for a Global Group Head of Risk or Compliance in a major Tier One house, but by and large, the average compliance officer earns significantly less than someone in the financial role.
Thus, the tendency is for compliance staff to remain in post for a relatively short period of time, moving on regularly, not necessarily to gain significant increases in technical or domain knowledge, but merely to get more money. This means that financial houses are always having to begin again in their search for compliance staff, and are constantly having to train and re-train at the most basic level, which is the level that itself, does not understand the higher compliance needs imposed by increasingly global standard setting agencies.
So the compliance department develops a vicious circle of inexperience. The very people who should be developing long-term skills and should be laying down deep roots into the fabric of the institution in order to be able to bring a growth of experience to their role and function, are moving on to other fields, having to re-train again in a new house, while new staff have to be found to replace them. Because they are traditionally poorly paid, they have to recruit from a relatively low level of school leaver, or junior grade to fill the necessary posts.
Compliance thus increasingly becomes more a question of written process or procedures, and pen-pushing staff spend a huge amount of time complying with written protocols, ticking boxes as opposed to bringing real investigative verve to the process; and real practicable fraud experience and compliance grey heads are left on the shelf. Being told they are too qualified or too experienced for a particular role is the constant complaint of many hugely experienced candidates, because their skills demand far more money, and their experience can prove to be a difficult challenge, when some particular piece of potentially lucrative but dubiously flaky business presents itself. Easier not to employ them at all!
As a direct result of this short-sighted but deliberate policy, bankers rarely know what their real compliance exposures are, so secretly want their software vendors to be able to come to them and provide a full consultancy-led sales process, one which they can trust and rely on, but they let themselves down by refusing to engage in a sensible internal product review process as to which vendor to choose. This is a vital part of the product selection process because different vendors sell different tools, and one particular product may not be right for an individual bank’s needs.
One of the major problems associated with this practice is that in the case of compliance procedural software, the department possessing the sole need for the solutions is the under-resourced Compliance Department. Even today, such departments are not widely respected inside the banking culture. Banks may be willing to pay lip-service to the concept of ‘reputation protection’ but they are generally unwilling to spend the kind of money it may necessarily take to provide that cover.
The bank’s IT department is unlikely to understand the regulatory imperative of the software and is all too likely to spend a lot of time arguing against the need to buy such software in from outside providers, arguing the case for creating the solution internally. This is just a normal case of ‘turf protection’, and only very rarely does the internal IT department manage to build a suitable form of compliance system. However, in too many cases, the Compliance Department is too far down the food-chain to have any real ‘clout’ in managing the debate about how much money to spend, and in all too many cases, they end up with only a small percentage of the budget they need, meaning they either buy the wrong product altogether, just for the sake of implementing something, or they try to eke out their limited budget by acquiring products that will simply not scale sufficiently to meet their needs.
Unhappily, the vendors so very rarely help themselves by employing the right people to sell their products. They employ frankly sub-standard people who are unwilling to take the time to learn the inner workings of the products they are being increasingly called upon to sell, and who are equally unwilling to learn the inner workings and imperatives of their potential clients. Instead they merely rely on the standard ‘Give me the three killer facts I need to get their attention’, and then they rely instead on an over-elaboration of their achievements and give a differentially truthful picture of what the product can do.
To succeed most effectively in this space requires a root and branch re-engineering of the thinking behind the kind of people needed by the vendors of solutions to lead the sales development of their solutions.
First, the people selected to lead the sales process must be individuals who possess significant domain expertise in their own right to be able to hold down a senior consulting role in any professional provider. Their personal skills must be sufficient to be capable to winning the trust of the clients with whom they will be expected to work in an equal and harmonious partnership. Their primary aim at the start of the process must be to win the trust of the potential client and to demonstrate such a sufficiency of professional expertise that the client can expect their judgement to be unimpeachable.
Secondly, having demonstrated a very high level of domain expertise in their knowledge of the law and the regulatory interface required, including knowledge of the functions and the environment within which the regulatory systems are required to operate, the sales leader must be capable of working with the client to determine the most effective and efficient way of implementing the product’s capabilities for their best needs. To this end, the sales leader must be capable of demonstrating thought leadership by bringing a high level of compliance consulting knowledge to the process. By demonstrating strength and high competency in this function, the sales leader not only generates greater client acceptance of his product’s capabilities, but places himself and his product in the position of being a ‘trusted brand’ which is vital, if the closing of the sales process and its subsequent longer-term relationship management is to be successful.
Thirdly, and finally, the sales leader must be capable of maintaining a post-sales regime of client care and product nurturing and development, in order to continue to ensure that the client maintains his faith in both the sales procedures, and the quality of the product at the same time. Such a regime must be continued through the delivery of on-going training in both the use of the product, but also in the wider understanding of the financial crime phenomenon itself, so that better interpretive analysis can be achieved from the alerts generated through the use of the process. This should be coupled with the demonstration of greater client-relationship management skills, through on-going regular compliance feedback and client information processes.
In this way, the relationship between the vendor and the client becomes one of mutual synergy, one in which the client plays an equal role with the vendor in identifying and determining the way forward in achieving the delivery of a ‘best execution’ process for the client’s needs, and dispense with the unfortunate lack of trust in the validity of the product purchased and the integrity of the vendor’s salespeople, which presently so identify the present sales process of compliance transaction monitoring product offerings.
With my grateful thanks to Fearghal McGoveran for his valuable contributions to this article.
Wednesday 28 January 2009
Sunday 25 January 2009
The origins of the banking greed culture
A lot of people have asked me in recent days how we ever got into this incredibly damaging state of affairs, where apparently well-educated and purportedly sensible men and women began to run the banking sector like it was a high-stakes poker game for a bunch of private high-rollers!
If you ask these former ‘Masters of the Universe’ whether they have read the writings of Edwin Sutherland, Gilbert Geiss, Robert Merton, Austin Turk, or more recently and perhaps more potently, Barry Rider, Michael Levi, Michael Clarke, Tom Naylor, or even my own very small contributions to the literature, you will find universal ignorance.
Much as one would like to put the blame on their bullying personalities, inflated-egos and indefensible arrogance, that is not enough. That is almost too easy, and makes the problem sound almost pathologic.
It is not just these things, but it is also a monumental failure to learn the lessons of history and to be able to deconstruct lessons from our past. Those of us who have been in the game long enough have seen this all before. This is part of the problem for the regulators and their staff. Most of them are so young, they have never experienced this kind of situation before and so do not know how to handle the fall-out.
Well, for the ignorant and uninformed, here is my take on the origins of this crazy, bizarre, money-go-round, where if you want to make a mess of an industry, hire a management consultant, but if you really want to damage it beyond repair, then just choose the CEO of a major name bank, and watch its assets tank!
Back in the 1970’s and 1980’s most businesses, both in the USA and the UK operated on a fairly sensible basis of commercial conduct. Most of them recognized that they existed in a form of mutually supporting interlinked relationship with their workforce, and that their lives and well-being were mutually sustainable. I am looking at a macro picture here, I do not intend to focus on small, individual disputes or disagreements at individual factories or works premises. In fact, it needed politicians to begin to really screw things up, but that came later, and is a story for another time.
Towns and cities very often supported one or two major industrial entities, and the local works very often became the employer-of-choice for the town. These businesses owned premises, they had an order book, they produced finished products and they hoped to make reasonable and realistic profits, both to pay sensible dividends and grow their business. They had careful relationships with their banks, who knew their business, understood the annual fluctuations of their order and sales books, and who had money loaned to the business on sound commercial terms to provide liquidity in the hard times.
Then, in the late 1970’s and early 1980’s a group of aggressive businessmen on both sides of the Atlantic began to take a close look at the way in which these businesses were structured, and they quickly realized that their asset value, when broken up, did not meet, in any way, their share value, and that most companies’ shares where grossly undervalued. They were not interested in the companies’ social relationship with their work-force, and they were not concerned about the long-term effect on unemployment on working-class communities, they merely wanted to strip the valuable assets out of the companies for their own benefit, and leave the dross behind.
Thus began the era, first of the ‘asset strippers, quickly followed by the piratical arbitrageurs or ‘arbs’. Given immense acquisition power by the use of a financial derivative instrument created in the US by a financial genius Lew Ranieri, the ‘junk bond’ became the offensive weapon in the hands of the Corporate Raiders, as they marched into battle, singing their anthem of releasing ‘shareholder value’.
Thus was spawned by great myth of ‘shareholder value’. It was a lie from the very start because the most aggressive activities were being brought by men who had only very recently acquired a few shares in a potential target company, as a justification for their actions. From early beginnings, the corporate raids multiplied, spinning off a new business which became called the ‘Mergers and Acquisitions’ industry. Suddenly, all the big law firms, merchant banks, accountanting businesses, ‘investigating consultants’, everyone wanted to pile into the M&A business, because it was a multi, multi billion dollar business, and the simple mathematics of the business model meant that the loser paid the bills.
It was literally a no-lose situation, and lawyers and merchant bankers grew incredibly rich on the back of M&A. Vast sums of money were spent on attacking and defending corporate takeovers, it was enough merely to hear a rumour that a particular raider was taking a look at a particular company, for the share price to climb exponentially. Company directors literally fell over themselves to account for every penny of cash and every asset owned by their business, so that their share price more accurately reflected their asset value. It didn’t make their businesses any more efficient or profitable, but it was a means of keeping the business going and out of the hands of the asset strippers.
What it did was to make business more short-term, demanding ever-greater revenue delivery in a shorter and shorter time-span. It stripped business of investment capital and dried up liquidity in the form of capital assets.
Such a febrile atmosphere naturally spawned its own derivative activities, and predicated the rise in insider trading, as gamblers, speculators and insiders gorged themselves on the stock of these companies.
It took the prosecution of Dennis Levine, Ivan Boesky and Michael Milken in the US in the late 1980’s to drive the stake through the heart of the great monster that had been spawned by the arbs, nurtured by greed, and other people’s money, and which had ruined huge swathes of the commercial landscape, particularly in the USA.
The monster might have been laid low, but the short-term culture of the business environment had taken hold with a vengeance. US management found that stock analysts and Wall Street commentators were not going to relax their obsessions with the delivery of shareholder value, and they continued to focus their attention on the revenue streams that each quoted company was producing. It only took a single quarter’s figures to reflect a dip in revenues, for the Wall Street scribblers to issue dire warnings about the company’s profitability, and for the share price to take a southbound trip.
This conduct had a seriously deleterious effect upon the value of the shares and the share options which most US companies now insisted their staff and executives hold, part as a means of encouraging ever greater commitment, and part as a means of paying the ever-growing bonuses which these businesses were beginning to demand.
Having grown used to the bonus culture which had developed during the decade of M&A greed, the employees of the businesses were unwilling to give it up, and they were very often funded, partly in cash, and partly in corporate paper.
Thus everyone had a vested interest in ensuring that the share-price remained buoyant and that revenue streams were maintained, because otherwise, their share and option values took a hit!
This unhealthy atmosphere expanded, and expanded again. Banks and other businesses began to rely more upon the level of bonuses they were paying, than the basic salaries that their staff were taking home. The bonus became the means of ‘keeping score’, and it became an annual ritual where bonus compensation in millions of pounds or dollars became the norm.
The continued need to maintain the share price, both in the name of the myth of shareholder value, and more, to maintain the value of the bonus payment, became the only focus of the banks and institutions. Any business stream that could be manipulated to demonstrate vast profits and huge revenue flows became the ‘holy grail’, and thus the sub-prime mortgage business and its concomitant securitization processes, which seemed to be a stream of revenue without end, became the obsession of every banker, and every financial driver.
So, now you know how the present situation was brought about!
Bernard Baruch, a Nobel Prize winning economist writing about the Wall Street Crash in 1929 said;
‘…At a time of dizzily rising prices, it behoves us to remember that one and one equals two. If we had remembered that simple formula, I believe that much of the present crisis could have been averted…’
Shame that ‘Fred the Shred’ and his fellow partners-in-shame hadn’t read Baruch either!
If you ask these former ‘Masters of the Universe’ whether they have read the writings of Edwin Sutherland, Gilbert Geiss, Robert Merton, Austin Turk, or more recently and perhaps more potently, Barry Rider, Michael Levi, Michael Clarke, Tom Naylor, or even my own very small contributions to the literature, you will find universal ignorance.
Much as one would like to put the blame on their bullying personalities, inflated-egos and indefensible arrogance, that is not enough. That is almost too easy, and makes the problem sound almost pathologic.
It is not just these things, but it is also a monumental failure to learn the lessons of history and to be able to deconstruct lessons from our past. Those of us who have been in the game long enough have seen this all before. This is part of the problem for the regulators and their staff. Most of them are so young, they have never experienced this kind of situation before and so do not know how to handle the fall-out.
Well, for the ignorant and uninformed, here is my take on the origins of this crazy, bizarre, money-go-round, where if you want to make a mess of an industry, hire a management consultant, but if you really want to damage it beyond repair, then just choose the CEO of a major name bank, and watch its assets tank!
Back in the 1970’s and 1980’s most businesses, both in the USA and the UK operated on a fairly sensible basis of commercial conduct. Most of them recognized that they existed in a form of mutually supporting interlinked relationship with their workforce, and that their lives and well-being were mutually sustainable. I am looking at a macro picture here, I do not intend to focus on small, individual disputes or disagreements at individual factories or works premises. In fact, it needed politicians to begin to really screw things up, but that came later, and is a story for another time.
Towns and cities very often supported one or two major industrial entities, and the local works very often became the employer-of-choice for the town. These businesses owned premises, they had an order book, they produced finished products and they hoped to make reasonable and realistic profits, both to pay sensible dividends and grow their business. They had careful relationships with their banks, who knew their business, understood the annual fluctuations of their order and sales books, and who had money loaned to the business on sound commercial terms to provide liquidity in the hard times.
Then, in the late 1970’s and early 1980’s a group of aggressive businessmen on both sides of the Atlantic began to take a close look at the way in which these businesses were structured, and they quickly realized that their asset value, when broken up, did not meet, in any way, their share value, and that most companies’ shares where grossly undervalued. They were not interested in the companies’ social relationship with their work-force, and they were not concerned about the long-term effect on unemployment on working-class communities, they merely wanted to strip the valuable assets out of the companies for their own benefit, and leave the dross behind.
Thus began the era, first of the ‘asset strippers, quickly followed by the piratical arbitrageurs or ‘arbs’. Given immense acquisition power by the use of a financial derivative instrument created in the US by a financial genius Lew Ranieri, the ‘junk bond’ became the offensive weapon in the hands of the Corporate Raiders, as they marched into battle, singing their anthem of releasing ‘shareholder value’.
Thus was spawned by great myth of ‘shareholder value’. It was a lie from the very start because the most aggressive activities were being brought by men who had only very recently acquired a few shares in a potential target company, as a justification for their actions. From early beginnings, the corporate raids multiplied, spinning off a new business which became called the ‘Mergers and Acquisitions’ industry. Suddenly, all the big law firms, merchant banks, accountanting businesses, ‘investigating consultants’, everyone wanted to pile into the M&A business, because it was a multi, multi billion dollar business, and the simple mathematics of the business model meant that the loser paid the bills.
It was literally a no-lose situation, and lawyers and merchant bankers grew incredibly rich on the back of M&A. Vast sums of money were spent on attacking and defending corporate takeovers, it was enough merely to hear a rumour that a particular raider was taking a look at a particular company, for the share price to climb exponentially. Company directors literally fell over themselves to account for every penny of cash and every asset owned by their business, so that their share price more accurately reflected their asset value. It didn’t make their businesses any more efficient or profitable, but it was a means of keeping the business going and out of the hands of the asset strippers.
What it did was to make business more short-term, demanding ever-greater revenue delivery in a shorter and shorter time-span. It stripped business of investment capital and dried up liquidity in the form of capital assets.
Such a febrile atmosphere naturally spawned its own derivative activities, and predicated the rise in insider trading, as gamblers, speculators and insiders gorged themselves on the stock of these companies.
It took the prosecution of Dennis Levine, Ivan Boesky and Michael Milken in the US in the late 1980’s to drive the stake through the heart of the great monster that had been spawned by the arbs, nurtured by greed, and other people’s money, and which had ruined huge swathes of the commercial landscape, particularly in the USA.
The monster might have been laid low, but the short-term culture of the business environment had taken hold with a vengeance. US management found that stock analysts and Wall Street commentators were not going to relax their obsessions with the delivery of shareholder value, and they continued to focus their attention on the revenue streams that each quoted company was producing. It only took a single quarter’s figures to reflect a dip in revenues, for the Wall Street scribblers to issue dire warnings about the company’s profitability, and for the share price to take a southbound trip.
This conduct had a seriously deleterious effect upon the value of the shares and the share options which most US companies now insisted their staff and executives hold, part as a means of encouraging ever greater commitment, and part as a means of paying the ever-growing bonuses which these businesses were beginning to demand.
Having grown used to the bonus culture which had developed during the decade of M&A greed, the employees of the businesses were unwilling to give it up, and they were very often funded, partly in cash, and partly in corporate paper.
Thus everyone had a vested interest in ensuring that the share-price remained buoyant and that revenue streams were maintained, because otherwise, their share and option values took a hit!
This unhealthy atmosphere expanded, and expanded again. Banks and other businesses began to rely more upon the level of bonuses they were paying, than the basic salaries that their staff were taking home. The bonus became the means of ‘keeping score’, and it became an annual ritual where bonus compensation in millions of pounds or dollars became the norm.
The continued need to maintain the share price, both in the name of the myth of shareholder value, and more, to maintain the value of the bonus payment, became the only focus of the banks and institutions. Any business stream that could be manipulated to demonstrate vast profits and huge revenue flows became the ‘holy grail’, and thus the sub-prime mortgage business and its concomitant securitization processes, which seemed to be a stream of revenue without end, became the obsession of every banker, and every financial driver.
So, now you know how the present situation was brought about!
Bernard Baruch, a Nobel Prize winning economist writing about the Wall Street Crash in 1929 said;
‘…At a time of dizzily rising prices, it behoves us to remember that one and one equals two. If we had remembered that simple formula, I believe that much of the present crisis could have been averted…’
Shame that ‘Fred the Shred’ and his fellow partners-in-shame hadn’t read Baruch either!
Wednesday 21 January 2009
Being honest about the financial sector!
It’s not often that I disagree with Ian King in the Times’ ‘Business Commentary’, I rely too much on him for some really good quotes.
But today I must honestly say that I can not agree with him in his comments about the way in which the FSA have penalized chipmaker Wolfson for dragging their feet over the making of a public announcement of some news which possessed significant price-sensitive qualities.
Put simply Wolfson failed to disclose in March 2008 that it had lost a key contract with Apple Computers to provide chips for its next generation of the iPod music player. It appears that Wolfson were advised by their investor relations consultants that they did not have to make the disclosure, after Wolfson disclosed that Apple had awarded it another contract to supply chips for the new iPhone. It was opined that the revenues from the new contract would balance and therefore cancel out the loss of revenues from the iPod contract.
Subsequently, Wolfson sought advice from their lawyers and then disclosed the facts to the market. The immediate impact was that Wolfson’s share price suffered an 18% hit over its previous close.
Subsequently, the FSA have fined Wolfson £140,000 for failing to make a timely disclosure of negative financial information.
In his turn, Ian King, has adopted the ‘City apologist’ stance and has sought to argue that if experienced City practitioners such as Wolfson’s advisers ‘…cannot recognize what amounts to price-sensitive information, how can anyone else..?’
He admits later in his very fair piece ‘…The truth is that, while suspicious trading before price-sensitive statements is as common as ever, no-one has been jailed for insider dealing since the Financial Services and Markets Act became law [ ]… Until they are, the suspicion remains that the FSA is happy shooting fish in a barrel…it is one way to try and prevent such information leaking, but hardly the most effective or fair…’
Putting the immediate issue of the Wolfson case to one side, and turning to a more general overview of financial conduct, if anything about the financial news in the last few days and weeks has taught us anything, it is that vast sectors of the financial sector have completely lost their real sense of moral obligation towards their shareholders, their market counterparties, and, in the long run, to the ordinary people who make up the bulk of the working population of this country and whose futures and those of their families depend so much on the financial sector playing by the rules.
We, the ordinary members of the community who don’t benefit from the big salaries, and the bigger pensions and the obscene bonuses which the City fat-cats have been spraying around each other, have every right to expect that if we entrust them with our savings, our investments and our pension funds, then the price of letting them play in their free market is that the least they will do with our money and its future safety is to treat it as a sacred trust. We don’t expect them to run off on some bizarre frolic of worthless foreign acquisitions, a spending spree of such lunatic proportions that they frankly deserve to be certified.
We don’t legitimize them to put their ego on the line while they challenge their fellow CEO’s in competing institutions to play a game of ‘let’s see whose got the harder balls and the bigger dick!
And we expect them to comply with the rules which the FSA and the other regulators expect to be obeyed.
And that’s the point of this blog!
As Ian King says, ‘…suspicious trading before price-sensitive statements is as common as ever…’ Such market activity is a very strong symptom that the body-financial is infected with the virus of greed and insider sleaze, and that is a disease that needs a very painful cure! The problem is that in recent years, the regulation of the City has been allowed to be carried out with a ‘light touch’, and the financial institutions have been allowed to push back against the implications of important regulatory constraints. Capital adequacy rules have been weakened and relaxed; City apologists have protested that the rules are too complicated and that no-one can understand them. Trade associations push hard to pressure Regulators to give detailed definitions of what the rules mean, and then, armed with such a definition, the practitioners burst a blood vessel running to their lawyers and paying them massive fees to tell them how to get round the constraints.
The market pushes the envelope again and again, and as long as the wheel doesn’t fall off, regulators, financiers and politicians all jog along together in a complicit state of regulatory anomie.
So, let’s stop pretending please that it was ever any different. Those of us who have been around long enough can read the signs and we know that this mess has been caused by too little regulatory activity on a bunch of truly greedy bastards, acknowledged and tacitly encouraged by a complacent political environment, which believed that the money sloshing round in the cesspit that was the financial sector, was evidence of their political genius in market understanding and the wisdom of their ‘soft-touch’ control .
The only way back now, if anyone wants the investing public to inculcate any meaningful re-belief in the integrity of these markets, and God knows, without them, Governments will have very short shelf-lives, then we must see the re-introduction of the observance and the imposition of the financial sector rules, executed in as draconian a fashion as possible.
Insider dealers must expect immediate prison sentences. Those who manipulate the market ( the doom and gloom merchants who talk this country’s companies down, or spread malicious rumors about a company’s value, all the while shorting the stock for all they are worth), must be willing to spend time inside. Those who commit criminal offences by deliberately ignoring the imposition of important legal regulatory constraints because of the cost implications, must expect to share a cell, even if only for a couple of weeks, (it wouldn’t need any more), with a steroid-crazed body builder who misses his comforts!
Bank CEO’s who fail to deliver meaningful investor value, (not shareholder, notice, any clown with enough money can become a bank shareholder), I am talking about investor value, should not be allowed to scuttle off clutching a huge pay-off, pension fund contributions and compensation for loss of office. Failure in a free market should be penalized, not rewarded.
A new Government, one untainted with these scandals, must, as a matter of immediate priority, put the systems and controls in place to ensure that no fat cat, ego-tripper or rogue CEO can ever again, bring this country and its financial infrastructure to the state we are in today. If that means banging up a few bankers, then let’s get on with it! It may not sound very fair, but you’d be amazed how many people in this country would be willing to slam the cell door!
But today I must honestly say that I can not agree with him in his comments about the way in which the FSA have penalized chipmaker Wolfson for dragging their feet over the making of a public announcement of some news which possessed significant price-sensitive qualities.
Put simply Wolfson failed to disclose in March 2008 that it had lost a key contract with Apple Computers to provide chips for its next generation of the iPod music player. It appears that Wolfson were advised by their investor relations consultants that they did not have to make the disclosure, after Wolfson disclosed that Apple had awarded it another contract to supply chips for the new iPhone. It was opined that the revenues from the new contract would balance and therefore cancel out the loss of revenues from the iPod contract.
Subsequently, Wolfson sought advice from their lawyers and then disclosed the facts to the market. The immediate impact was that Wolfson’s share price suffered an 18% hit over its previous close.
Subsequently, the FSA have fined Wolfson £140,000 for failing to make a timely disclosure of negative financial information.
In his turn, Ian King, has adopted the ‘City apologist’ stance and has sought to argue that if experienced City practitioners such as Wolfson’s advisers ‘…cannot recognize what amounts to price-sensitive information, how can anyone else..?’
He admits later in his very fair piece ‘…The truth is that, while suspicious trading before price-sensitive statements is as common as ever, no-one has been jailed for insider dealing since the Financial Services and Markets Act became law [ ]… Until they are, the suspicion remains that the FSA is happy shooting fish in a barrel…it is one way to try and prevent such information leaking, but hardly the most effective or fair…’
Putting the immediate issue of the Wolfson case to one side, and turning to a more general overview of financial conduct, if anything about the financial news in the last few days and weeks has taught us anything, it is that vast sectors of the financial sector have completely lost their real sense of moral obligation towards their shareholders, their market counterparties, and, in the long run, to the ordinary people who make up the bulk of the working population of this country and whose futures and those of their families depend so much on the financial sector playing by the rules.
We, the ordinary members of the community who don’t benefit from the big salaries, and the bigger pensions and the obscene bonuses which the City fat-cats have been spraying around each other, have every right to expect that if we entrust them with our savings, our investments and our pension funds, then the price of letting them play in their free market is that the least they will do with our money and its future safety is to treat it as a sacred trust. We don’t expect them to run off on some bizarre frolic of worthless foreign acquisitions, a spending spree of such lunatic proportions that they frankly deserve to be certified.
We don’t legitimize them to put their ego on the line while they challenge their fellow CEO’s in competing institutions to play a game of ‘let’s see whose got the harder balls and the bigger dick!
And we expect them to comply with the rules which the FSA and the other regulators expect to be obeyed.
And that’s the point of this blog!
As Ian King says, ‘…suspicious trading before price-sensitive statements is as common as ever…’ Such market activity is a very strong symptom that the body-financial is infected with the virus of greed and insider sleaze, and that is a disease that needs a very painful cure! The problem is that in recent years, the regulation of the City has been allowed to be carried out with a ‘light touch’, and the financial institutions have been allowed to push back against the implications of important regulatory constraints. Capital adequacy rules have been weakened and relaxed; City apologists have protested that the rules are too complicated and that no-one can understand them. Trade associations push hard to pressure Regulators to give detailed definitions of what the rules mean, and then, armed with such a definition, the practitioners burst a blood vessel running to their lawyers and paying them massive fees to tell them how to get round the constraints.
The market pushes the envelope again and again, and as long as the wheel doesn’t fall off, regulators, financiers and politicians all jog along together in a complicit state of regulatory anomie.
So, let’s stop pretending please that it was ever any different. Those of us who have been around long enough can read the signs and we know that this mess has been caused by too little regulatory activity on a bunch of truly greedy bastards, acknowledged and tacitly encouraged by a complacent political environment, which believed that the money sloshing round in the cesspit that was the financial sector, was evidence of their political genius in market understanding and the wisdom of their ‘soft-touch’ control .
The only way back now, if anyone wants the investing public to inculcate any meaningful re-belief in the integrity of these markets, and God knows, without them, Governments will have very short shelf-lives, then we must see the re-introduction of the observance and the imposition of the financial sector rules, executed in as draconian a fashion as possible.
Insider dealers must expect immediate prison sentences. Those who manipulate the market ( the doom and gloom merchants who talk this country’s companies down, or spread malicious rumors about a company’s value, all the while shorting the stock for all they are worth), must be willing to spend time inside. Those who commit criminal offences by deliberately ignoring the imposition of important legal regulatory constraints because of the cost implications, must expect to share a cell, even if only for a couple of weeks, (it wouldn’t need any more), with a steroid-crazed body builder who misses his comforts!
Bank CEO’s who fail to deliver meaningful investor value, (not shareholder, notice, any clown with enough money can become a bank shareholder), I am talking about investor value, should not be allowed to scuttle off clutching a huge pay-off, pension fund contributions and compensation for loss of office. Failure in a free market should be penalized, not rewarded.
A new Government, one untainted with these scandals, must, as a matter of immediate priority, put the systems and controls in place to ensure that no fat cat, ego-tripper or rogue CEO can ever again, bring this country and its financial infrastructure to the state we are in today. If that means banging up a few bankers, then let’s get on with it! It may not sound very fair, but you’d be amazed how many people in this country would be willing to slam the cell door!
Tuesday 20 January 2009
Ask not for whom the bell tolls - Why Fred Goodwin, Adam Applegarth and Dick Fulds are in the same club!
In recent years, well, ever since Tom Wolfe wrote ‘Bonfire of the Vanities’ anyway, major players in the financial world seem to have become imbued with the obsession with their desire for membership of an exclusive club.
In order to get in, you don’t have to know anything, you don’t have to be particularly well-qualified, and you can get admitted for free, but never-the-less, it still manages to maintain its exclusivity.
All you need is an overbearing manner, a bullying temperament, an overweening belief in your own self-importance, an obsession with the importance of utter irrelevancies, oh, and I almost forgot, to have overseen the complete collapse of a major financial institution with world record-breaking losses.
To lose a few quid is easy; while to count among the ranks of the big global wreckers, you have to be able to count in millions; but to get into this club, you have to count your losses in billions, anything less, and you are just a piker!
This ‘vaulting ambition’ as it was described fitted no one more clearly than Dick Fuld, referred to in a Times article, as ‘…the almost unbearably intense man who had been chairman and chief executive of Lehman since 1993, surrounded with a cult of personality, a “command-and-control CEO”, those closest to him slaved like courtiers to a medieval monarch, second-guessing his moods and predilections…’
Then there is Adam Applegarth, the cricket-loving Tynesider with no banking qualifications who took Northern Rock straight down the tubes.
Finally and probably keeping the best to last there is ‘Fred the Shred’ as he was known by the disgruntled employees whom he threw on the street in his periodical cost-cutting episodes. Sir Fred Goodwin, the former chief executive of Royal Bank of Scotland, some will feel, is the leading contender for the title of world’s worst banker. I can’t imagine any of the lower orders whom he so cavalierly removed along the way in support of his share-price, will shed any salt tears for him.
What connects these hapless three apart from their egos!
Their obsession with complete irrelevancies appears to be a common thread.
Fuld inspired great fear, his staff fretting over minute details of his schedule down to the flower arrangements in his surroundings, oh, and insulating him from trouble – from almost anything he might not want to hear.
Flower arranging, God help us, or sports figures!
Applegarth was described in an article in the Times as having a brash, and at times arrogant, personality who was obsessed by cricket statistics.
"He had a habit of asking people who their top five fast bowlers were," said one observer. "And when they gave their opinion he would fire back that they were wrong and the real answer was X, Y and Z." Those who disagreed with Applegarth or questioned his decisions were brushed aside.
Another obsession seems to be clothing.
Fuld’s ferocity was said to be intimidating, ‘…his eyebrows beetling tight over his hard eyes, his brutally angular brow appearing to contort in rage. He would regularly upbraid colleagues for minor wardrobe malfunctions – in Dick’s book, that tended to mean anything other than a dark suit and a white shirt…’
Goodwin was the same, obsessed with clothing!
‘…Sir Fred ran a tight ship and, according to one former colleague, brooked no criticism. He had curious fads, insisting that his executives dress conservatively and that every senior male wear a tie with the RBS logo…’
Boy, mustn’t that have been fun. There you are, a senior executive of a major bank, probably earning £3-400,000 easily, don’t tell me you buy your suits at C&A. Just how elegant must some tacky, greasy, polyester RBS logo tie look with your Gieves and Hawkes bespoke double worsted and your Turnbull and Asser shirt?
I could go on but I think the point is made.
What all these men, and a whole load of others I could name, all seem to have in common is the fact that they had left their humanity behind. They had lost sight of their ordinary commonality and they had begun to believe the bullshit that got periodically written about them. They had begun to believe their own press releases, always a dangerous temptation.
Of even greater concern however, is that they had all allowed their egos to rule their common sense, and they had begun to think that they could go on and on pushing the margins of risk and financial experimentation without ever bothering to think of the consequences.
Trouble is, there are still a lot like them, still out there, and still, for now, in command of their financial institutions. I wonder who will be the next to add to the list of club members?
In order to get in, you don’t have to know anything, you don’t have to be particularly well-qualified, and you can get admitted for free, but never-the-less, it still manages to maintain its exclusivity.
All you need is an overbearing manner, a bullying temperament, an overweening belief in your own self-importance, an obsession with the importance of utter irrelevancies, oh, and I almost forgot, to have overseen the complete collapse of a major financial institution with world record-breaking losses.
To lose a few quid is easy; while to count among the ranks of the big global wreckers, you have to be able to count in millions; but to get into this club, you have to count your losses in billions, anything less, and you are just a piker!
This ‘vaulting ambition’ as it was described fitted no one more clearly than Dick Fuld, referred to in a Times article, as ‘…the almost unbearably intense man who had been chairman and chief executive of Lehman since 1993, surrounded with a cult of personality, a “command-and-control CEO”, those closest to him slaved like courtiers to a medieval monarch, second-guessing his moods and predilections…’
Then there is Adam Applegarth, the cricket-loving Tynesider with no banking qualifications who took Northern Rock straight down the tubes.
Finally and probably keeping the best to last there is ‘Fred the Shred’ as he was known by the disgruntled employees whom he threw on the street in his periodical cost-cutting episodes. Sir Fred Goodwin, the former chief executive of Royal Bank of Scotland, some will feel, is the leading contender for the title of world’s worst banker. I can’t imagine any of the lower orders whom he so cavalierly removed along the way in support of his share-price, will shed any salt tears for him.
What connects these hapless three apart from their egos!
Their obsession with complete irrelevancies appears to be a common thread.
Fuld inspired great fear, his staff fretting over minute details of his schedule down to the flower arrangements in his surroundings, oh, and insulating him from trouble – from almost anything he might not want to hear.
Flower arranging, God help us, or sports figures!
Applegarth was described in an article in the Times as having a brash, and at times arrogant, personality who was obsessed by cricket statistics.
"He had a habit of asking people who their top five fast bowlers were," said one observer. "And when they gave their opinion he would fire back that they were wrong and the real answer was X, Y and Z." Those who disagreed with Applegarth or questioned his decisions were brushed aside.
Another obsession seems to be clothing.
Fuld’s ferocity was said to be intimidating, ‘…his eyebrows beetling tight over his hard eyes, his brutally angular brow appearing to contort in rage. He would regularly upbraid colleagues for minor wardrobe malfunctions – in Dick’s book, that tended to mean anything other than a dark suit and a white shirt…’
Goodwin was the same, obsessed with clothing!
‘…Sir Fred ran a tight ship and, according to one former colleague, brooked no criticism. He had curious fads, insisting that his executives dress conservatively and that every senior male wear a tie with the RBS logo…’
Boy, mustn’t that have been fun. There you are, a senior executive of a major bank, probably earning £3-400,000 easily, don’t tell me you buy your suits at C&A. Just how elegant must some tacky, greasy, polyester RBS logo tie look with your Gieves and Hawkes bespoke double worsted and your Turnbull and Asser shirt?
I could go on but I think the point is made.
What all these men, and a whole load of others I could name, all seem to have in common is the fact that they had left their humanity behind. They had lost sight of their ordinary commonality and they had begun to believe the bullshit that got periodically written about them. They had begun to believe their own press releases, always a dangerous temptation.
Of even greater concern however, is that they had all allowed their egos to rule their common sense, and they had begun to think that they could go on and on pushing the margins of risk and financial experimentation without ever bothering to think of the consequences.
Trouble is, there are still a lot like them, still out there, and still, for now, in command of their financial institutions. I wonder who will be the next to add to the list of club members?
Monday 19 January 2009
‘Goodwill Impairment Charge’ - RBS comes up with another wonderful euphemism!
What the hell is a ‘goodwill impairment charge’? No, you read it right, a goodwill impairment charge!
Just in case you have never heard of this singular phenomenon, let me quote from an RBS statement released today on Yahoo!
“…Royal Bank of Scotland unveiled the biggest loss in British corporate history on Monday, overshadowing a second government bailout for the sector and sending its shares reeling to a 23-year low.
RBS said it would report a 2008 loss of up to 28 billion pounds, driven largely by a goodwill impairment charge of 15 to 20 billion pounds related to its acquisition of parts of Dutch rival ABN AMRO in 2007.
Excluding goodwill impairment, the bank said in a statement it expects a full-year loss of 7 to 8 billion pounds…”
Oh well, that’s ok then, that’s perfectly acceptable. It makes everything alright now, doesn’t it!
I mean they only really made a loss of between 7-8 billion pounds, and that they blamed on ‘…challenging credit and market conditions in the fourth quarter of 2008…’ so they can’t be held liable for that, either.
I mean, hello, whatever! Didn’t they know there was a banking crisis in September 2008, then? I mean, how do you lose between 7-8 billion pounds in just 3 months, particularly when you must have already been extremely worried about your diminishing ‘goodwill impairment’ at ABN Amro! I mean, you would think that someone inside RBS would have said, ‘…hey guys, let’s try and keep the other losses down to a minimum, shall we…’
So, to get back to the goodwill impairment thingy then!
What can this possibly mean, what course of action is this phrase meant to cover up?
If you look it up in a dictionary, this is what you get.
“…An intangible asset above and beyond the concrete value of a business or asset. For example, the value of a business’s good name and customer relationships. Goodwill is listed as an asset on a company’s balance sheet and must be amortized over its reasonable life, which can’t exceed 40 years. If a large corporation purchased a small business for $25 million, but its actual value is determined to be $35 million, goodwill is valued at $10 million...’
So, this must mean that whatever value for goodwill ABN Amro quoted on their balance sheet at the time of acquisition in 2007, turned out to be ‘impaired’ by the end of 2008. When such an impairment turns out to be worth between 15 to 20 billion pounds ( oh come on, let’s not be picky about greater accuracy, what’s the odd 5 billion pounds between shareholders these days), you have got to start wondering whether or not there just might have been the slightest miscalculation of the worth ABN Amro placed on themselves at the time of the deal!
It was only in February of 2008 that RBS cemented the ABN deal. Some city commentators thought then that their deal would be ‘challenging’. Christopher Wheeler of Bear Stearns was quoted as saying; “…For Royal Bank of Scotland it looks more of a challenge, especially as it is acquiring the business most affected by the recent market turbulence…”
But Sir Fred Goodwin, the chief executive of RBS, said, “We are happy we bought what we thought we bought.”
For God’s sake, what did he think he had bought? RBS went on to say that it had come across no nasty shocks after its joint acquisition of ABN Amro and expected to squeeze more synergies from the deal than it originally pencilled in.
There were “no eureka moments or silver bullets” but many cost savings such as a 20 per cent cut in ABN's stationery bill and savings in shared computer software. “There are a lot of areas where it just goes ching, ching, ching, ching, ching,” Sir Fred said.
Well, there it is, ching, ching, ching, as Sir Fred said. Of course, he is no longer at RBS to have to face the cameras and the music any more, and explain why ching, ching, ching, now sounds like doh! doh! doh! The BBC website describes his period at RBS thus;
“…He was instrumental in turning RBS from a cosy, comfortable regional bank into one of the world’s biggest. He was also instrumental in sowing the seeds that have led to RBS being bailed out by the taxpayer. He paid too much for ABN Amro – a lion’s share of the £48bn cost to the consortium taking over the Dutch bank – and, by failing to achieve a better balance between capital and assets, left RBS under-capitalised and vulnerable to a banking crisis that has needed Government intervention. “He has run the bank far too close to the bone,” said one long-time RBS pundit…”
If I were an RBS shareholder, which thank God I am not, I think I might be asking whether there was a proper asset value due diligence enquiry undertaken prior to the purchase of ABN Amro, and whether, in their anxiety to beat Barclays to the deal and to stamp their machismo on the banking market, the Board of RBS were reckless as to whether the representations made by the Dutch Bank as to the worth of their goodwill, were really genuine or not. However, if they did fail to make the proper investigations, I think I would start to wonder how much their pension funds are worth!
Just in case you have never heard of this singular phenomenon, let me quote from an RBS statement released today on Yahoo!
“…Royal Bank of Scotland unveiled the biggest loss in British corporate history on Monday, overshadowing a second government bailout for the sector and sending its shares reeling to a 23-year low.
RBS said it would report a 2008 loss of up to 28 billion pounds, driven largely by a goodwill impairment charge of 15 to 20 billion pounds related to its acquisition of parts of Dutch rival ABN AMRO in 2007.
Excluding goodwill impairment, the bank said in a statement it expects a full-year loss of 7 to 8 billion pounds…”
Oh well, that’s ok then, that’s perfectly acceptable. It makes everything alright now, doesn’t it!
I mean they only really made a loss of between 7-8 billion pounds, and that they blamed on ‘…challenging credit and market conditions in the fourth quarter of 2008…’ so they can’t be held liable for that, either.
I mean, hello, whatever! Didn’t they know there was a banking crisis in September 2008, then? I mean, how do you lose between 7-8 billion pounds in just 3 months, particularly when you must have already been extremely worried about your diminishing ‘goodwill impairment’ at ABN Amro! I mean, you would think that someone inside RBS would have said, ‘…hey guys, let’s try and keep the other losses down to a minimum, shall we…’
So, to get back to the goodwill impairment thingy then!
What can this possibly mean, what course of action is this phrase meant to cover up?
If you look it up in a dictionary, this is what you get.
“…An intangible asset above and beyond the concrete value of a business or asset. For example, the value of a business’s good name and customer relationships. Goodwill is listed as an asset on a company’s balance sheet and must be amortized over its reasonable life, which can’t exceed 40 years. If a large corporation purchased a small business for $25 million, but its actual value is determined to be $35 million, goodwill is valued at $10 million...’
So, this must mean that whatever value for goodwill ABN Amro quoted on their balance sheet at the time of acquisition in 2007, turned out to be ‘impaired’ by the end of 2008. When such an impairment turns out to be worth between 15 to 20 billion pounds ( oh come on, let’s not be picky about greater accuracy, what’s the odd 5 billion pounds between shareholders these days), you have got to start wondering whether or not there just might have been the slightest miscalculation of the worth ABN Amro placed on themselves at the time of the deal!
It was only in February of 2008 that RBS cemented the ABN deal. Some city commentators thought then that their deal would be ‘challenging’. Christopher Wheeler of Bear Stearns was quoted as saying; “…For Royal Bank of Scotland it looks more of a challenge, especially as it is acquiring the business most affected by the recent market turbulence…”
But Sir Fred Goodwin, the chief executive of RBS, said, “We are happy we bought what we thought we bought.”
For God’s sake, what did he think he had bought? RBS went on to say that it had come across no nasty shocks after its joint acquisition of ABN Amro and expected to squeeze more synergies from the deal than it originally pencilled in.
There were “no eureka moments or silver bullets” but many cost savings such as a 20 per cent cut in ABN's stationery bill and savings in shared computer software. “There are a lot of areas where it just goes ching, ching, ching, ching, ching,” Sir Fred said.
Well, there it is, ching, ching, ching, as Sir Fred said. Of course, he is no longer at RBS to have to face the cameras and the music any more, and explain why ching, ching, ching, now sounds like doh! doh! doh! The BBC website describes his period at RBS thus;
“…He was instrumental in turning RBS from a cosy, comfortable regional bank into one of the world’s biggest. He was also instrumental in sowing the seeds that have led to RBS being bailed out by the taxpayer. He paid too much for ABN Amro – a lion’s share of the £48bn cost to the consortium taking over the Dutch bank – and, by failing to achieve a better balance between capital and assets, left RBS under-capitalised and vulnerable to a banking crisis that has needed Government intervention. “He has run the bank far too close to the bone,” said one long-time RBS pundit…”
If I were an RBS shareholder, which thank God I am not, I think I might be asking whether there was a proper asset value due diligence enquiry undertaken prior to the purchase of ABN Amro, and whether, in their anxiety to beat Barclays to the deal and to stamp their machismo on the banking market, the Board of RBS were reckless as to whether the representations made by the Dutch Bank as to the worth of their goodwill, were really genuine or not. However, if they did fail to make the proper investigations, I think I would start to wonder how much their pension funds are worth!
Sunday 18 January 2009
The Great Student Funding Swindle
If, like me, you have young people at University, you will be aware of the concern most, if not all of them have, about emerging at the end of their courses, carrying a burden of debt around their necks which they will be required to repay.
Who could have ever dreamed up this piece of inspired lunacy, and why was it enacted?
Step forward our greedy, ruthless friends, the High Street Banks, with their contemporary passion for debt and all things borrowed!
Years ago, if you were a student, most banks wouldn’t even look at you with anything other than utter derision, if you tried to open an account. You had to be introduced by someone they knew, (usually a parent, with a good solvency record), and they in their turn had to sign their lives away in order to underwrite your potential debts.
If you wanted a credit card, well, you would have to demonstrate at least 2 years careful and prudent account management before they would even consider letting you have one of those dangerous items, oh and guess what, Dad had to underwrite that as well.
Then, one day, a young risk manager in some back room somewhere, came to the realization by examining the history of bank lending in the UK, that of all the money lent to unsecured borrowers, a repeated average of 88% of all customers consistently paid their debts, in full and on time. He had stumbled across the submerged British fear of debt and indebtedness, and the concomitant social taboo of insolvency or personal bankruptcy.
Unlike America, where an early bankruptcy or two is merely the badge of the entrepreneur, in Britain, to be publicly ‘outed’ as a debtor, was a major badge of shame and dishonor. The obsessive fear of being buried in a pauper’s grave led millions of ordinary working men and women to save a penny a week with the early insurance companies, in order to be able to pay for a proper funeral and a dignified burial. The ‘Man from the Pru’ who called at working-class doors every Friday night and solemnly noted down the penny and twopenny contributions handed over by calloused hands, was the forerunner of a financial revolution.
Once financial institutions realized the implications of this important figure of a virtually guaranteed 88% return of all loaned capital, it didn’t take them long to come up with an interest rate which would take care of the shortfall, and thus the credit card boom was underwritten. More than any other financial facility, the credit card caused another revolution in spending practices, and enabled ordinary people to spend more than they owned, and by spreading the debt over a period of time, and charging a phenomenal rate of IPR, credit card providers still benefited from the magical wizardry of the 88% return of the initial capital borrowed.
Once securitization of indebtedness became more standardized, it didn’t take very long before the banks had found themselves on a ‘no-brainer’, sure thing.
The only problem was that there were only a limited number of traditional banking customers that they could encourage to engage in this activity, and ironically, many of those clients tended to use the credit card as a charge card and pay off its capital spending within the first month of the debt. So, while the credit card had stimulated a High Street spending movement, the banks were now having to compete harder for the profits from the cards.
Reducing interest rates was one way to become more competitive, but that tended to challenge the profitability aspect, and took the risk mathematics closer to the edge where the potential loss shortfall had to be guaranteed.
So the banks did what they are very good at doing, they looked around for another market. Recognising that the 88% rule still held true, they started experimenting with lending longer-term, instantly securitized, money to fund the purchase of furniture and household goods, thus spawning a rash of off-motorway warehouses crammed to the rafters with cheap, nasty and shoddy furniture, beds and carpets and kitchens, which offered 2, 3 even 4 years interest-free lending to potential customers, in order to attract them in to the store. In fact, so effective was this marriage between the crappy furniture manufacturers and the money lenders, that ordinary shoppers who wanted to pay cash or by cheque for the goods, were discouraged and the credit terms were virtually forced on them instead.
However, the magic 88% figure still held good, and the money-go-round went on.
In the search for ever new markets to exploit, the banks were having to come up with ever-more ingenious initiatives. The research boys and girls went into their back rooms, crunched their numbers, and came up with another remarkable statistic. They discovered that when new students went to university, in order to be able to bank their grants and living allowances, they tended to open bank accounts on-campus, and in most cases, in the same bank as that which their parents had used. What was even more amazing was that a very significant number of new students, kept their early bank accounts going, once they had graduated, or merely transferred them to other branches of the same institution elsewhere.
In other words, students were remarkably loyal, whether through inertia or gratitude, to their original bank, and a high percentage, yes, you’ve probably guessed it, about 80%, fulfilled that profile.
It was not a major leap between reconciling the two statistics before the banks realized that they had an untapped potentially new market available to them. All those student bank accounts who would remain loyal to them, and who would repay 88% of any loans they received.
At the same time, Tony Blair and New Labour were desperately trying to find a solution to their well-publicised policy of extending university education to a much wider number of students, ostensibly to create more social equality, but in reality, to keep the unemployed statistics down to more manageable levels.
Announcing policies is one thing, paying for them, quite another. But then the time and effort invested in the Prawn Cocktail offensive, the practice first begun under the deceased John Smith, of getting New Labour apparatchiks to make friends and contacts with the financial sector, started to pay off.
The banks had a way of making the whole thing happen, and it would not cost Government anything because they would make the students responsible for their own debts, through the form of repayable loans. Students would be lent money through a lending forum to pay their fees etc, which they would then be required to repay over time.
The banks were prepared to take on this responsibility, because it meant that they were guaranteed a vast new market of potential clients, and they would not even have to wait for these people to start earning money to spend, because they would be got into debt within a few weeks of opening the accounts from their education loans. These loans would eventually be repaid, but that didn’t matter because the debts were securitized anyway, and the students would become long-term clients of the banks for the foreseeable future. It was a dream come true.
The only problem was that the banks had, in their greed and in their obscene obsession with their own profitability and their bonuses, started to lend to a whole new market of borrowers. It is called ‘the sub-prime’ market, and what that means in ordinary terms, is a group of people who would not, in the old days, have even been allowed to set foot inside a bank, never mind have an account with them. These were the unwaged, the underclass, call them what you will, but the banks saw them as just another market to load with debt, thus meeting their monthly lending targets to get more and more money on the streets.
Lending officers started lending money to consolidate other unpaid debts, County Court judgements, unsatisfied loan agreements, outstanding child maintenance payments, all the shoddy detritus of the underclass, hand to mouth, way of existence, but it didn’t matter, because they also sold them nigh impossible-to-activate insurance policies which enabled the banks to buy unsatisfied debt insurance cover for themselves.
In the end, all banking prudency and ordinary conventional banking practice went down the tubes, as the debts piled up, and, more importantly, the value and worth of the 88% rule was eroded.
You see, the 88% rule only ever worked while it was based upon the statistical evaluation of those clients who borrowed money under the old rules of banking. In other words, they were the decent, prudent, careful, honest, yes, let us not balk at that word, honest people, who would repay their debts. It was on their borrowing habits that the statistic was based, not upon the ‘here today, gone tomorrow’ culture of the rapidly growing British chav class, repeatedly re-financing their growing indebtedness on the back of the dubiously increased value of their properties, whose values were only being inflated by a market reacting to the meaningless amounts of money being paid to bankers and their satraps for simply keeping the money going round. In the end it had to stop!
So, now we have a whole generation of students, up to their ears in debt, and whose chances of getting a job at the end of their studies is increasingly challenging. At the same time, they will be unable to borrow any money to fund a house purchase, even if they have work, because banks will not now lend to anyone, no matter how much tax-payer’s money is shoveled into them. What chance these youngsters will have for re-paying these debts is uncertain, and will only fuel an increasingly bad credit record for them, so all in all, they should not be blamed for saying ‘Fuck you very much, Mr Blair’!
I am increasingly enraged when I keep hearing banking apologists talking about the need to retain the best financial brains in the UK and the need to maintain the status quo of salaries and bonuses in the banking industry in order to do so. I would just like to meet some of these so-called ‘banking brains’ and challenge them to justify their actions and their conduct. It isn’t going to happen, because they are all too busy hiding from those of us who are on the receiving end of their incompetence.
Who could have ever dreamed up this piece of inspired lunacy, and why was it enacted?
Step forward our greedy, ruthless friends, the High Street Banks, with their contemporary passion for debt and all things borrowed!
Years ago, if you were a student, most banks wouldn’t even look at you with anything other than utter derision, if you tried to open an account. You had to be introduced by someone they knew, (usually a parent, with a good solvency record), and they in their turn had to sign their lives away in order to underwrite your potential debts.
If you wanted a credit card, well, you would have to demonstrate at least 2 years careful and prudent account management before they would even consider letting you have one of those dangerous items, oh and guess what, Dad had to underwrite that as well.
Then, one day, a young risk manager in some back room somewhere, came to the realization by examining the history of bank lending in the UK, that of all the money lent to unsecured borrowers, a repeated average of 88% of all customers consistently paid their debts, in full and on time. He had stumbled across the submerged British fear of debt and indebtedness, and the concomitant social taboo of insolvency or personal bankruptcy.
Unlike America, where an early bankruptcy or two is merely the badge of the entrepreneur, in Britain, to be publicly ‘outed’ as a debtor, was a major badge of shame and dishonor. The obsessive fear of being buried in a pauper’s grave led millions of ordinary working men and women to save a penny a week with the early insurance companies, in order to be able to pay for a proper funeral and a dignified burial. The ‘Man from the Pru’ who called at working-class doors every Friday night and solemnly noted down the penny and twopenny contributions handed over by calloused hands, was the forerunner of a financial revolution.
Once financial institutions realized the implications of this important figure of a virtually guaranteed 88% return of all loaned capital, it didn’t take them long to come up with an interest rate which would take care of the shortfall, and thus the credit card boom was underwritten. More than any other financial facility, the credit card caused another revolution in spending practices, and enabled ordinary people to spend more than they owned, and by spreading the debt over a period of time, and charging a phenomenal rate of IPR, credit card providers still benefited from the magical wizardry of the 88% return of the initial capital borrowed.
Once securitization of indebtedness became more standardized, it didn’t take very long before the banks had found themselves on a ‘no-brainer’, sure thing.
The only problem was that there were only a limited number of traditional banking customers that they could encourage to engage in this activity, and ironically, many of those clients tended to use the credit card as a charge card and pay off its capital spending within the first month of the debt. So, while the credit card had stimulated a High Street spending movement, the banks were now having to compete harder for the profits from the cards.
Reducing interest rates was one way to become more competitive, but that tended to challenge the profitability aspect, and took the risk mathematics closer to the edge where the potential loss shortfall had to be guaranteed.
So the banks did what they are very good at doing, they looked around for another market. Recognising that the 88% rule still held true, they started experimenting with lending longer-term, instantly securitized, money to fund the purchase of furniture and household goods, thus spawning a rash of off-motorway warehouses crammed to the rafters with cheap, nasty and shoddy furniture, beds and carpets and kitchens, which offered 2, 3 even 4 years interest-free lending to potential customers, in order to attract them in to the store. In fact, so effective was this marriage between the crappy furniture manufacturers and the money lenders, that ordinary shoppers who wanted to pay cash or by cheque for the goods, were discouraged and the credit terms were virtually forced on them instead.
However, the magic 88% figure still held good, and the money-go-round went on.
In the search for ever new markets to exploit, the banks were having to come up with ever-more ingenious initiatives. The research boys and girls went into their back rooms, crunched their numbers, and came up with another remarkable statistic. They discovered that when new students went to university, in order to be able to bank their grants and living allowances, they tended to open bank accounts on-campus, and in most cases, in the same bank as that which their parents had used. What was even more amazing was that a very significant number of new students, kept their early bank accounts going, once they had graduated, or merely transferred them to other branches of the same institution elsewhere.
In other words, students were remarkably loyal, whether through inertia or gratitude, to their original bank, and a high percentage, yes, you’ve probably guessed it, about 80%, fulfilled that profile.
It was not a major leap between reconciling the two statistics before the banks realized that they had an untapped potentially new market available to them. All those student bank accounts who would remain loyal to them, and who would repay 88% of any loans they received.
At the same time, Tony Blair and New Labour were desperately trying to find a solution to their well-publicised policy of extending university education to a much wider number of students, ostensibly to create more social equality, but in reality, to keep the unemployed statistics down to more manageable levels.
Announcing policies is one thing, paying for them, quite another. But then the time and effort invested in the Prawn Cocktail offensive, the practice first begun under the deceased John Smith, of getting New Labour apparatchiks to make friends and contacts with the financial sector, started to pay off.
The banks had a way of making the whole thing happen, and it would not cost Government anything because they would make the students responsible for their own debts, through the form of repayable loans. Students would be lent money through a lending forum to pay their fees etc, which they would then be required to repay over time.
The banks were prepared to take on this responsibility, because it meant that they were guaranteed a vast new market of potential clients, and they would not even have to wait for these people to start earning money to spend, because they would be got into debt within a few weeks of opening the accounts from their education loans. These loans would eventually be repaid, but that didn’t matter because the debts were securitized anyway, and the students would become long-term clients of the banks for the foreseeable future. It was a dream come true.
The only problem was that the banks had, in their greed and in their obscene obsession with their own profitability and their bonuses, started to lend to a whole new market of borrowers. It is called ‘the sub-prime’ market, and what that means in ordinary terms, is a group of people who would not, in the old days, have even been allowed to set foot inside a bank, never mind have an account with them. These were the unwaged, the underclass, call them what you will, but the banks saw them as just another market to load with debt, thus meeting their monthly lending targets to get more and more money on the streets.
Lending officers started lending money to consolidate other unpaid debts, County Court judgements, unsatisfied loan agreements, outstanding child maintenance payments, all the shoddy detritus of the underclass, hand to mouth, way of existence, but it didn’t matter, because they also sold them nigh impossible-to-activate insurance policies which enabled the banks to buy unsatisfied debt insurance cover for themselves.
In the end, all banking prudency and ordinary conventional banking practice went down the tubes, as the debts piled up, and, more importantly, the value and worth of the 88% rule was eroded.
You see, the 88% rule only ever worked while it was based upon the statistical evaluation of those clients who borrowed money under the old rules of banking. In other words, they were the decent, prudent, careful, honest, yes, let us not balk at that word, honest people, who would repay their debts. It was on their borrowing habits that the statistic was based, not upon the ‘here today, gone tomorrow’ culture of the rapidly growing British chav class, repeatedly re-financing their growing indebtedness on the back of the dubiously increased value of their properties, whose values were only being inflated by a market reacting to the meaningless amounts of money being paid to bankers and their satraps for simply keeping the money going round. In the end it had to stop!
So, now we have a whole generation of students, up to their ears in debt, and whose chances of getting a job at the end of their studies is increasingly challenging. At the same time, they will be unable to borrow any money to fund a house purchase, even if they have work, because banks will not now lend to anyone, no matter how much tax-payer’s money is shoveled into them. What chance these youngsters will have for re-paying these debts is uncertain, and will only fuel an increasingly bad credit record for them, so all in all, they should not be blamed for saying ‘Fuck you very much, Mr Blair’!
I am increasingly enraged when I keep hearing banking apologists talking about the need to retain the best financial brains in the UK and the need to maintain the status quo of salaries and bonuses in the banking industry in order to do so. I would just like to meet some of these so-called ‘banking brains’ and challenge them to justify their actions and their conduct. It isn’t going to happen, because they are all too busy hiding from those of us who are on the receiving end of their incompetence.
Monday 12 January 2009
“…And the voice of the dinosaur is heard in the land…”
Reading my ‘Sunday Times’ on 11th January 2009, I chanced upon this little gem;
“…Sir Sandy Crombie, chief executive of Standard Life, has warned that over-regulation of the financial sector once the current crisis is over will stifle enterprise and innovation.
He said governments had to take their share of the blame for fuelling the crisis. ‘Crises will happen’ opines the recently knighted Hibernian. ‘Crises will emerge again but you have to bear in mind this crisis was not precipitated entirely by the financial sector’, Crombie said.”
Oh, silly me, whatever was I thinking? Of course not, those wicked members of the public who had no creditworthiness, and just bamboozled those innocent bankers into lending them money they were never going to repay, they were to blame! It was all their fault, just demanding more and more money on the strength of their inflated property values to stand up their maxed-out credit card bills. Yeah, whatever!
Over-regulation stifle enterprise and innovation? Oh no, not this old chestnut again, what utter poppycock. No pal, we’re not buying this old shibboleth any more. We got told this by you greedy people for years and years, and you sold it to successive Governments, and particularly this dumb bunch inside New Labour, and they bought it. Maybe you can blame them for being gullible, but you lot started the problem, and along the way, you and your colleagues filled your boots with huge bonuses and fat pension contributions.
Yes, I know you gave up a bonus payment 3 years ago when things weren’t exactly going too well, but you have’nae exactly demonstrated too much enterprise and innovation yersel’ recently, have ye!
I am hugely grateful to Ian King of the Times on 31st December 2008 for pointing out the following assertions, like how your 2007 £5 billion failed take-over of Resolution wasn’t exactly a masterpiece of business acumen after Pearl had finished trashing you! What about some of the other glaring examples of innovation and enterprise Ian King discloses, wee man?
• October 2008, Standard Life slashed payouts on with-profits savings policies by up to 13 per cent - a far larger reduction than those announced by others.
• At up to 30 per cent, Standard Life's exit penalties are among the industry's most punitive.
• Over half of Standard Life's endowment mortgage customers face a shortfall when their policies mature.
• Standard Life has created an incentive for policyholders to remain locked into poorly performing funds by insisting that any distribution of orphan assets will be delayed until customers' policies mature.
• Standard Life's banking unit was one of those mortgage lenders that dragged its feet, contrary to the Government's wishes, in passing on November's 150-basis-point cut in Bank rate to borrowers.
However
• As Bradford & Bingley's biggest shareholder, Standard Life was a leading supporter of the £400million rights issue orchestrated by the Financial Services Authority in July, agreeing to sub-underwrite it - leaving policyholders with thumping losses when B&B was nationalised.
So, no more nonsense about regulation stifling enterprise and innovation. If we, the saving public had been getting the kind of regulation the financial sector really needs, we would all still be quids-in right now and not wondering how our pension plans got screwed. What did you say you got your knighthood for anyway, eh?
“…Sir Sandy Crombie, chief executive of Standard Life, has warned that over-regulation of the financial sector once the current crisis is over will stifle enterprise and innovation.
He said governments had to take their share of the blame for fuelling the crisis. ‘Crises will happen’ opines the recently knighted Hibernian. ‘Crises will emerge again but you have to bear in mind this crisis was not precipitated entirely by the financial sector’, Crombie said.”
Oh, silly me, whatever was I thinking? Of course not, those wicked members of the public who had no creditworthiness, and just bamboozled those innocent bankers into lending them money they were never going to repay, they were to blame! It was all their fault, just demanding more and more money on the strength of their inflated property values to stand up their maxed-out credit card bills. Yeah, whatever!
Over-regulation stifle enterprise and innovation? Oh no, not this old chestnut again, what utter poppycock. No pal, we’re not buying this old shibboleth any more. We got told this by you greedy people for years and years, and you sold it to successive Governments, and particularly this dumb bunch inside New Labour, and they bought it. Maybe you can blame them for being gullible, but you lot started the problem, and along the way, you and your colleagues filled your boots with huge bonuses and fat pension contributions.
Yes, I know you gave up a bonus payment 3 years ago when things weren’t exactly going too well, but you have’nae exactly demonstrated too much enterprise and innovation yersel’ recently, have ye!
I am hugely grateful to Ian King of the Times on 31st December 2008 for pointing out the following assertions, like how your 2007 £5 billion failed take-over of Resolution wasn’t exactly a masterpiece of business acumen after Pearl had finished trashing you! What about some of the other glaring examples of innovation and enterprise Ian King discloses, wee man?
• October 2008, Standard Life slashed payouts on with-profits savings policies by up to 13 per cent - a far larger reduction than those announced by others.
• At up to 30 per cent, Standard Life's exit penalties are among the industry's most punitive.
• Over half of Standard Life's endowment mortgage customers face a shortfall when their policies mature.
• Standard Life has created an incentive for policyholders to remain locked into poorly performing funds by insisting that any distribution of orphan assets will be delayed until customers' policies mature.
• Standard Life's banking unit was one of those mortgage lenders that dragged its feet, contrary to the Government's wishes, in passing on November's 150-basis-point cut in Bank rate to borrowers.
However
• As Bradford & Bingley's biggest shareholder, Standard Life was a leading supporter of the £400million rights issue orchestrated by the Financial Services Authority in July, agreeing to sub-underwrite it - leaving policyholders with thumping losses when B&B was nationalised.
So, no more nonsense about regulation stifling enterprise and innovation. If we, the saving public had been getting the kind of regulation the financial sector really needs, we would all still be quids-in right now and not wondering how our pension plans got screwed. What did you say you got your knighthood for anyway, eh?
“Dragging Us Into a Law and Order Society” Part 2.
In the previous blog on this subject, I floated the idea that the UK Government intends to find new ways in which to tax us in order to make up the shortfall in the UK Treasury which will inevitably arise as a result of her new ‘spend us out of trouble’ policies. I had begun to examine the rush to greater criminalization as a means of providing the justification for confiscating our assets, as an alternative to punitive taxation.
The Americans have willingly adopted ‘follow the money’ confiscatory crime control policies for some years, and there is absolutely no evidence to show that it has had any meaningful impact upon the prevention, or detection of crime, nor has it provided any form of disincentive to criminals to continue committing crimes.
When discussing policies such as criminal confiscation, Naylor states;
‘…Some might argue that all this is a necessary response to an overarching social evil…Others might suggest that the entire exercise is simply insane. Despite lurid tales of great criminal hoards in the hands of great criminal hoards, no-one really knows how much criminal income and wealth exists, how illegal gains are distributed or how deleterious their impact on legitimate society is…’
Ironically, this is the very admission made in the Treasury document, but as Naylor points out later, is intended to have only one important influence, on the mind of the politicians.
‘…All that those frightening statistics really prove is that it is not necessary to take the square root of a negative sum to arrive at a purely imaginary number…the objective was not to illuminate the shadowy world of crime so much as to enlighten politicians about the need for larger law enforcement budgets and more arbitrary police powers. Therefore those magic numbers assume the status of religious cant and are rarely revised, except heavenward…’
The religious image is a useful one when considering the present state of British politics and its approach to crime in society. Trotting out the idea that criminals commit crimes for purely economically rational reasons, helps to persuade committed politicians of deeply held religious beliefs that their interdictory tactics are not merely good policy, but are underpinned by a strong moral justification for taking such action on the basis that crime must not be allowed to be seen to pay!
Naylor again on the issue of changing attitudes towards crime;
‘…In the new era of free-marketeering, the cant changed to favour punishment of individual wrongdoers. If, according to the old view, economically motivated crime was largely the consequence of unequal social and economic opportunity, then the government would be expected to redress the imbalance. But if, according to the new view, it was merely the work of bad people, there was no need to address the existing distribution of wealth and power. Thus the criminal came to be viewed not as a complex product of psycho-socio-economic conditions but as a simple cost-benefit calculator. It followed that crime could be addressed by merely tilting the likely outcome of such a calculation to reduce the potential profitability of the criminal’s actions, and to incapacitate (by stripping away economic assets as well as by imprisonment) those who failed to heed the initial warning…’
Returning to the UK Treasury Strategy document, yet another piece of spurious moral doggerel, unsupported by any empirical evidence whatsoever makes its appearance.
‘…Squeezing the profits from crime should reduce criminality directly in two ways. First, there will be less money available to finance future criminal activity. Second, lower criminal proceeds will reduce the incentive of crime as a lifestyle. A criminal lifestyle involves the risk of being caught and punished and the rewards have to be sufficient to make it worthwhile taking such risks. If the proceeds are reduced then some potential criminals may be dissuaded from the activity as a lifestyle. Showing that crime does not pay and criminals are not allowed to enjoy their ill-gotten gains will stop them from becoming “role models” in their communities and take away the false glamour that attaches to a criminal lifestyle in some communities.
Again, the authors of the Treasury Strategy document have been allowed to trot out more unjustifiable nonsense masquerading as empirical fact. One problem is that those who were responsible for its genesis, (the authors of the earlier report issued by the Policy Innovation Unit) failed to address and make the very important distinction between predatory crimes and market-based crimes. They instead refer to ‘acquisitive’ crimes, thus re-engineering the concept behind the definition of the underlying criminality, and giving it a far more obvious ‘cost-benefit calculation’ profile, thus bringing it firmly within the moral ambit of the ‘crime is a disease and I am the cure’ mantra of contemporary, New Labour thinking.
When talking about the periodical moral panics which grip all societies from time to time, Naylor examines the psychological mentality of the USA during the era of Prohibition, (from which era the follow-the-money and anti-money laundering mind-set flows), and sees significant parallels with modern society, on both sides of the Atlantic.
‘…There was a dramatic change in the direction of law enforcement. For the first time, the main thrust of the police action shifted from combating predatory offences (robbery, extortion, theft, practiced at the expense of an unwilling public) to attacking market-based crimes (in which underground entrepreneurs attempted to service the forbidden consumption need of a complicit public). Although both types of crime are lumped together in the criminal code, the economic nature of each is profoundly different and therefore so is the appropriate attitude of the authorities towards the profits derived from each…’
It is in the fundamental re-wording of the definition of crime as ‘acquisitive’ in the report, that the document sows so many seeds of potential problems for the future, but making up new words and phrases or redefining premises and inserting them into policy documents does not seem to pose any difficulties for New Labour apparatchiks, as we have seen amply demonstrated so recently elsewhere.
Naylor again;
‘…Predatory offences involve the redistribution of existing wealth. The transfers are bilateral, involving victim and perpetrator. These transfers are also involuntary commonly using force or the threat of force…because the transfer is involuntary, the morality is unambiguous – therefore, over and above direct punishment of the guilty party, the justice system’s response is restitution to the victim of his or her property…’
A perfectly sound policy of unimpeachable credentials. We have had restitutionary legislation in England and Wales since the 1970s. The problem became more manifest when the Courts demonstrated a diminishing willingness to use it effectively.
‘…By contrast, market-based crimes involve the production and distribution of new goods and services that happen to be illegal by their very nature. The exchanges are multilateral, much like legitimate market transactions, involving producers on the supply side and final consumers on the demand side. Because the transfers are voluntary, it is difficult to define a victim, unless it is some abstract concept such as ‘society’. Therefore there are no definable losses to any individual from the act itself…’
If we begin to look at the wider criminal problem in these terms, we can begin to see the underlying fallacy of the Treasury argument. Taking the proceeds of crime away from predatory criminals is little more than an illusion, because they never have enough money available to confiscate in the first place. Fundamentally, they commit their crimes to finance their otherwise dysfunctional lifestyle, and they use those proceeds, such as are generated, to purchase drugs, alcohol, and possibly food. The minimalist profits are spent almost as soon as they are realised, and very little is left to make its way into the hands of financial institutions. The last thing on the burglar’s mind as he runs off with a stolen stereo is which bank he should approach in which to deposit the proceeds of his crimes!
On the other hand, market-based crimes, deliver a huge volume of goods and services to a willing market. These criminals are merely ‘alternative’ commodity suppliers, and they operate on a ‘willing seller, willing buyer’ basis. They are the supply side of the criminal equation, and it is naive in the extreme to assume that they can be effectively dealt with and successfully interdicted by ‘follow the money’ crime control methods, in the broader spectrum, ie, the arena in which Government expects to see results.
The only people who still willingly espouse these methods are the law-enforcement lobby, whose appetite for spending more and more tax-payers’ money knows no limits. Nevertheless, despite a significant volume of evidence to the contrary, researched by practitioners of unimpeachable academic reputations, governments and their servants continue to ignore empirical evidence, preferring instead to promulgate polices of manifest nonsense like these being produced in the Treasury Strategy document.
The Americans have willingly adopted ‘follow the money’ confiscatory crime control policies for some years, and there is absolutely no evidence to show that it has had any meaningful impact upon the prevention, or detection of crime, nor has it provided any form of disincentive to criminals to continue committing crimes.
When discussing policies such as criminal confiscation, Naylor states;
‘…Some might argue that all this is a necessary response to an overarching social evil…Others might suggest that the entire exercise is simply insane. Despite lurid tales of great criminal hoards in the hands of great criminal hoards, no-one really knows how much criminal income and wealth exists, how illegal gains are distributed or how deleterious their impact on legitimate society is…’
Ironically, this is the very admission made in the Treasury document, but as Naylor points out later, is intended to have only one important influence, on the mind of the politicians.
‘…All that those frightening statistics really prove is that it is not necessary to take the square root of a negative sum to arrive at a purely imaginary number…the objective was not to illuminate the shadowy world of crime so much as to enlighten politicians about the need for larger law enforcement budgets and more arbitrary police powers. Therefore those magic numbers assume the status of religious cant and are rarely revised, except heavenward…’
The religious image is a useful one when considering the present state of British politics and its approach to crime in society. Trotting out the idea that criminals commit crimes for purely economically rational reasons, helps to persuade committed politicians of deeply held religious beliefs that their interdictory tactics are not merely good policy, but are underpinned by a strong moral justification for taking such action on the basis that crime must not be allowed to be seen to pay!
Naylor again on the issue of changing attitudes towards crime;
‘…In the new era of free-marketeering, the cant changed to favour punishment of individual wrongdoers. If, according to the old view, economically motivated crime was largely the consequence of unequal social and economic opportunity, then the government would be expected to redress the imbalance. But if, according to the new view, it was merely the work of bad people, there was no need to address the existing distribution of wealth and power. Thus the criminal came to be viewed not as a complex product of psycho-socio-economic conditions but as a simple cost-benefit calculator. It followed that crime could be addressed by merely tilting the likely outcome of such a calculation to reduce the potential profitability of the criminal’s actions, and to incapacitate (by stripping away economic assets as well as by imprisonment) those who failed to heed the initial warning…’
Returning to the UK Treasury Strategy document, yet another piece of spurious moral doggerel, unsupported by any empirical evidence whatsoever makes its appearance.
‘…Squeezing the profits from crime should reduce criminality directly in two ways. First, there will be less money available to finance future criminal activity. Second, lower criminal proceeds will reduce the incentive of crime as a lifestyle. A criminal lifestyle involves the risk of being caught and punished and the rewards have to be sufficient to make it worthwhile taking such risks. If the proceeds are reduced then some potential criminals may be dissuaded from the activity as a lifestyle. Showing that crime does not pay and criminals are not allowed to enjoy their ill-gotten gains will stop them from becoming “role models” in their communities and take away the false glamour that attaches to a criminal lifestyle in some communities.
Again, the authors of the Treasury Strategy document have been allowed to trot out more unjustifiable nonsense masquerading as empirical fact. One problem is that those who were responsible for its genesis, (the authors of the earlier report issued by the Policy Innovation Unit) failed to address and make the very important distinction between predatory crimes and market-based crimes. They instead refer to ‘acquisitive’ crimes, thus re-engineering the concept behind the definition of the underlying criminality, and giving it a far more obvious ‘cost-benefit calculation’ profile, thus bringing it firmly within the moral ambit of the ‘crime is a disease and I am the cure’ mantra of contemporary, New Labour thinking.
When talking about the periodical moral panics which grip all societies from time to time, Naylor examines the psychological mentality of the USA during the era of Prohibition, (from which era the follow-the-money and anti-money laundering mind-set flows), and sees significant parallels with modern society, on both sides of the Atlantic.
‘…There was a dramatic change in the direction of law enforcement. For the first time, the main thrust of the police action shifted from combating predatory offences (robbery, extortion, theft, practiced at the expense of an unwilling public) to attacking market-based crimes (in which underground entrepreneurs attempted to service the forbidden consumption need of a complicit public). Although both types of crime are lumped together in the criminal code, the economic nature of each is profoundly different and therefore so is the appropriate attitude of the authorities towards the profits derived from each…’
It is in the fundamental re-wording of the definition of crime as ‘acquisitive’ in the report, that the document sows so many seeds of potential problems for the future, but making up new words and phrases or redefining premises and inserting them into policy documents does not seem to pose any difficulties for New Labour apparatchiks, as we have seen amply demonstrated so recently elsewhere.
Naylor again;
‘…Predatory offences involve the redistribution of existing wealth. The transfers are bilateral, involving victim and perpetrator. These transfers are also involuntary commonly using force or the threat of force…because the transfer is involuntary, the morality is unambiguous – therefore, over and above direct punishment of the guilty party, the justice system’s response is restitution to the victim of his or her property…’
A perfectly sound policy of unimpeachable credentials. We have had restitutionary legislation in England and Wales since the 1970s. The problem became more manifest when the Courts demonstrated a diminishing willingness to use it effectively.
‘…By contrast, market-based crimes involve the production and distribution of new goods and services that happen to be illegal by their very nature. The exchanges are multilateral, much like legitimate market transactions, involving producers on the supply side and final consumers on the demand side. Because the transfers are voluntary, it is difficult to define a victim, unless it is some abstract concept such as ‘society’. Therefore there are no definable losses to any individual from the act itself…’
If we begin to look at the wider criminal problem in these terms, we can begin to see the underlying fallacy of the Treasury argument. Taking the proceeds of crime away from predatory criminals is little more than an illusion, because they never have enough money available to confiscate in the first place. Fundamentally, they commit their crimes to finance their otherwise dysfunctional lifestyle, and they use those proceeds, such as are generated, to purchase drugs, alcohol, and possibly food. The minimalist profits are spent almost as soon as they are realised, and very little is left to make its way into the hands of financial institutions. The last thing on the burglar’s mind as he runs off with a stolen stereo is which bank he should approach in which to deposit the proceeds of his crimes!
On the other hand, market-based crimes, deliver a huge volume of goods and services to a willing market. These criminals are merely ‘alternative’ commodity suppliers, and they operate on a ‘willing seller, willing buyer’ basis. They are the supply side of the criminal equation, and it is naive in the extreme to assume that they can be effectively dealt with and successfully interdicted by ‘follow the money’ crime control methods, in the broader spectrum, ie, the arena in which Government expects to see results.
The only people who still willingly espouse these methods are the law-enforcement lobby, whose appetite for spending more and more tax-payers’ money knows no limits. Nevertheless, despite a significant volume of evidence to the contrary, researched by practitioners of unimpeachable academic reputations, governments and their servants continue to ignore empirical evidence, preferring instead to promulgate polices of manifest nonsense like these being produced in the Treasury Strategy document.
Wednesday 7 January 2009
“Dragging Us Into a Law and Order Society”
Philip Johnston, writing in the Daily Telegraph of 5th January, asks ‘Why is Labour so keen to imprison us?’
Amazingly, it has been officially established that since taking office in 1997, the Labour Government has introduced more than 3,600 new offences, of which 1,036 are punishable with imprisonment.
Having set this important hare running, Johnston them proceeds to completely lose the plot by retreating to the safe haven of some impossible contemporary vision of a society which does not suffer from ‘…an erosion of trust and with it the very scaffolding of a free society…’, and ends his piece imploring politicians of all persuasions to stop the ‘criminal justice arms race’.
Nevertheless, he should be congratulated for bringing this important question into the public debate, because it is a topic which informed criminologists have been debating for a long time, but without the benefit of a wider audience. The problem is that the financial sector is traditionally unwilling to address the criminological interpretation of the consequences of their own behavior, and does not want to spare the time to try and understand the implications of laws which are being secretively inserted by a dishonest government, and which have significant impacts for us all.
Why is this so important?
Because it holds some very serious lessons for us all, and it has a very dangerous interpretation which bodes badly for the future of our society. Put at its most simple, I assert that the intention of this Government is to find ever new ways of taxing us in order to meet the inevitable shortfall in public sector finances, and criminalizing us more and more provides a significant opportunity for ‘taxing’ us through the process of asset forfeiture.
The Proceeds of Crime Act, 2003 is where we must begin to try and unravel the new developments in legal thinking. The UK Government had been looking for a long time at the opportunities which presented themselves for amending the existing anti-money laundering legislation. There were very strong reasons why government wanted to beef up the existing legislation, most important of which was the new ambition to introduce a new agency which could be used in future to assist in the recovery of ‘criminal assets’. We should remind ourselves of the way in which government first prepared the way for this very dangerous and draconian legislation to be introduced.
It seemed to be ubiquitous inside the Blair administration that whenever the government wanted to introduce legislation which was intended to unravel hundreds of years of established civil liberties, it first commissioned a research study which began by asserting the desirability of the reforms to be achieved, usually by playing up the twin demonologies of ‘organised crime and terrorism’ and then, hey presto, almost as if by magic, the report’s summary provided for these changes in a form of a series of recommendations.
This is exactly what happened with the introduction of the Proceeds of Crime Act 2003.
It is my assertion that these provisions are all intended to enable governments to be able to ‘tax’ more effectively, and under Gordon Brown, these ambitions are not being diminished. In order to achieve this objective, the government has had to implement some significant changes in the ways in which the powers of the State can be levied against the individual and more importantly, against his property.
To do this they had commissioned the Policy Innovation Unit’s report of June 2000 entitled ‘Recovering the Proceeds of Crime’. Among the Report’s initial observations were the following observations;
The Government should take urgent steps to maximise the benefits that the pursuit and recovery of the proceeds of crime can offer. To achieve this, there will need to be:
a more strategic approach, with joined-up action from all relevant parts of the criminal justice system;
better trained and supported law enforcement officers able to pursue complex financial investigations;
a simpler and more robust legal regime, including extended civil forfeiture powers;
greater efforts to stem the laundering of criminal assets;
full use of the existing taxation powers;
a higher international standard, set by the UK; and
new structures and incentive mechanisms to underpin these changes.
I am sure you did not miss the careful use of the ‘taxation powers’ provisions identified in the fifth paragraph. This was always going to be the hidden agenda, but in order to be able to link it to the crime issue so as to provide the necessary degree of public support for its introduction, the government had to obfuscate the real reasons behind its policies. It did this by stressing the organised crime angle, in an attempt to give greater credence to its ambitions. The biggest problem with these arguments, as I have stressed before, is that they had very little if any criminological legitimacy, and certainly no real criminogenic logic.
In an article I wrote in June 2003 I reviewed some of the government’s assertions for the need to introduce a far more draconian regime of anti-money laundering compliance, and in doing so, I questioned some of their supporting arguments.
“…If we review the latest Treasury principles produced in a document entitled The UK Anti-Money Laundering Strategy, dated June 2003, we can see clearly enunciated, some of the glaring fantasies and intellectual weaknesses which are being promenaded as facts, but upon which the UK Government bases its AML policies, and with which the regulated sector is required to comply.
First, there is a complete absence of any empirical knowledge or evidence of the volume of dirty money in the system. The Strategy document states;
‘…There are no reliable estimates of the amount of money laundered in the UK every year. It cannot be measured directly and estimates based on measuring overall criminal proceeds will not pick up the costs of unreported crime. In June 2002, HMCE estimated that somewhere between £19 and £48 billion of criminal money is available annually for money laundering in the UK, with £25 billion being a realistic figure…’
This is a vital admission, a fundamental flaw in the argument, and one which immediately drives a coach and horses through the whole debate. The fact is we just don’t know how much money is being laundered, and we have no idea how to go about finding out. There is a huge and glaring disparity between £19 billion and £48 billion, and where do these figures come from in the first place? The Strategy document continues;
‘…Global money laundering has been estimated by the IMF as the equivalent of between 2 and 5 per cent of world output which could amount to $500 billion a year. Such an estimate applied to the UK would imply money laundering of £18-45 billion annually. It would be unwise to place great reliance on any of these estimates but it is undeniable that money laundering involves huge sums of money and that, as long as there are criminal proceeds there is going to be money laundering…’
There is that ubiquitous $500 billion figure again. It crops up in every report you read about money laundering, and it is based on no measurable or determinable fact at all.
So, it seems clear that we are basing a national policy which is costing significant sums in compliance costs, not only on a complete ignorance of the financial size of the problem which we are being asked to confront; but also underpinned by statistics of such dubious provenance that even those who parrot them most vociferously, are forced to admit that they are merely used for attracting attention, (most commonly political), and should not be relied upon! But what the hell, there must be a problem out there even if we cannot measure it or find any evidence to support it, so lets just throw lots of other people’s money at it!
What other nonsense is lurking in the pages of the Strategy Document? Consider this little gem!
‘…Acquisitive crimes are committed to enjoy the proceeds of crime. Deprive criminals of the proceeds of their crimes and they have less incentive to commit these crimes. Putting in place robust systems of regulation to detect, intercept and confiscate criminal funds will make it harder for criminals to profit from their criminality. Such controls are not going to stop all money laundering. But they will make it harder and this will reduce the profits, and the incentive to commit crime...’
Only a pure economist or perhaps a senior consultant in a leading consultancy could have dreamed up this particular piece of naive and uninformed gobbledegook! For the record, there is absolutely no criminological evidence whatsoever to support the assertion that depriving criminals of the proceeds of their crimes provides them with any disincentive, at all, to committing further crimes. If anything, its most likely outcome is to encourage them to commit further crimes to replace what they have lost.
This kind of bald and unsupported theory, masquerading as established fact, and being used therefore to underpin government policy, is not only nonsense, it is dangerous nonsense! It is dangerous because if government policy is based on such fundamentally flawed premises, then its enthusiastic enforcement is likely to cause more damage in the medium to long term to the legitimate market, than the very damage it is intended to prevent.
In the next edition we shall look more closely at the methods which have been adopted to bring this policy into fruition.
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